A Fresh Look at Organic Grocers

Whole Foods reduced its earnings guidance for 2014 in its recent financial report. As a result some investors may be inclined to look at other green grocers.

Mar 13, 2014 at 9:45AM

Whole Foods Market (NASDAQ:WFM) is widely known as the leading retail organic grocery chain. The sector is becoming increasingly competitive, however. More consumers are buying into the idea of all things green and choosing to lead healthier lifestyles. Whole Foods recently reduced its earnings guidance for 2014 but the company remains a good choice in the long term. That said, investors should shop around in the organic markets.

The Fresh Market: Whole Foods' key rival
The Fresh Market (NASDAQ:TFM) offers high-quality and fresh products to customers. The company's reach is not as broad as that of Whole Foods, as The Fresh Market currently operates 151 stores.

The organic grocer's share price performance over the past 12 months has been volatile, ranging from $32 to about $57 per share. This partially reflects consumers pulling back amid the persistently weak economy. In fact, the company reported in the third quarter that it saw an "unanticipated sales slowdown across its store base." It attributed the slowdown to changing economic conditions and softening consumer confidence.

The rough patch continued in the fourth quarter. The Fresh Market reported earnings per share of $0.39 -- a 9% decline year over year. It blamed the earnings decline on weaker sales and margins. Going forward, the company anticipates that 2014 will bring lower earnings per share than it had called for in its previous guidance -- it expects a range of $1.56-$1.66 per share.

Moreover, the Fresh Market announced a restructuring plan that calls for closing four underperforming stores in California and Texas. The charges related to these closures will be recorded in the first and second quarters of 2014. On the bright side, the company intends to open about 25 stores. 

So investors can decide if the current price is a bargain or take a look at these green grocers with better growth potential.

Sprouts Farmers Market: The new fresh kid on the green block
Sprouts Farmers Market (NASDAQ:SFM) launched its IPO last August and it has been a serious growth story since then. The company plans to become a key player in the organic retail sector by emphasizing fresh produce in addition to healthy dry goods.

In fiscal 2013, the company opened 19 new stores in states including Texas, California, Arizona, and Colorado, and two stores in Oklahoma. This brings the total number of stores to 167 across eight states -- for unit growth of 13%.

Sprouts' unit growth was coupled with very strong sales numbers as well. In the fourth quarter of 2013, the company reported net sales of $608.2 million. This represents a 27% increase over the same period in 2012. For the full year, the company also had hefty sales numbers -- a net of $2.44 billion or a 36% increase year over year.

Doug Sanders, president and chief executive officer of Sprouts, noted that the company "crossed the $2 billion sales milestone with the opening of 19 stores."

"This record performance, in our first year as a public company, demonstrates Sprouts' ability to create value, build trust and deliver on our strategy to successfully grow our company," he said.

It's also important to note that the company's sales success allowed it to pay down $40 million of its term loans. Furthermore, earnings per share have also been on the rise: up from $0.31 in 2012 to $0.48 in 2013. 

Finally, the company's guidance for 2014 is bullish. Spouts Farmers Market intends to open between 22 and 24 new stores this year. Net sales are expected to grow by 16% to 18%, and the company anticipates earnings per share in a range of $0.58 to $0.60. In sum, Sprouts Farmers Market is a good growth story.

Natural Grocers: Well-positioned for growth
Natural Grocers by Vitamin Cottage (NYSE:NGVC) is carving out a niche in the wholesale food sector.

The company's earnings per share grew by more than 51% in 2013 and Natural Grocers expects more of the same this year. In its last financial report, the company posted solid results for its first quarter of fiscal year 2014, which ended Dec. 31, 2013, and confirmed its outlook for fiscal year 2014. The company expects earnings per share growth of 33.5%. 

In the fourth quarter, Natural Grocers' net sales grew by 25.8% to $120.6 million, net income increased 31.6% to $2.9 million, and diluted earnings per share were $0.13. Going forward, the company plans to open 15 new stores, and expects same-store sales growth in a range of 8.5% to 9.5% with earnings per share of $0.58 to $0.63. 

In other words, Natural Grocers is well positioned for continued growth in 2014 and beyond as the economy looks like it will continue to improve.

The fresh outlook
Whole Foods Market will continue to set the table in the organic food sector despite its revised outlook for 2014. Meanwhile, growth stocks like Sprouts Farmers Market and Natural Grocers offer long-term investors opportunities to diversify. In the final analysis, the organic food sector will continue to grow and offer more healthy choices for consumers and investors.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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